Monday, 13 March 2017

Brexit is political, not economic.

A recurrent debate I keep having with Sam Lowe of Friends of the Earth is over the issue of Rules Of Origin. Using his own words, in order to take advantage of a preferential tariff rate, a business needs to prove that goods, or at least a significant chunk of its value, originates in the UK. This can be expensive - sometimes so expensive that, along with other fixed costs (see: paperwork), it wipes out the potential savings of paying a lower tariff.

This is true, however, what is often overlooked is the fact that Nissan and Airbus are multinationals with their own top grade mainframe systems, and in the case of Airbus they can trace the materials right down to the quarry the ore came from - as per requirements of airline safety. This all operations on major systems like SAP which have their own rules of origin systems and setting up features native to the software is not that much of a big deal. The data is already held on all of the components including price, origin and supplier.

In short, I'm not going to lose any sleep over the special pleading of car manufacturers who have to do this sort of thing anyway. Sam has it that some businesses may conclude that the savings on offer aren’t big enough. "For example: If I want to sell just one bit of machinery, and the preferential tariff rate is 5%, and the WTO rate is 6.5% … the extra paperwork just isn’t worth it for me or the importer".

This tends to be SMEs and when you're dealing with small volumes it really isn't worth bothering to learn the rules, and as Sam notes the utilisation rates on some trade deals remains low because of it. You might as well just pay the tariff and be done with it. This is important but not a show-stopper in that currency fluctuations are a far greater consideration than tariffs in some instances, and in the case of luxury or specialty items there simply isn't a competitor. Prices go up because prices go up. British steel for instance survives because it is high grade and it has tolerated bigger problems before.

I'm not sure what circumstances ROO may be applied but assuming our government is wise enough to avoid a crash and burn Brexit we can safely assume the corporates will be pulling the strings from both sides so Airbus and Nissan get their way.

Sam has it that it could lead to relocations but in the case of Airbus, for example, there are only so many places you can go with the right skills base and while you can very easily pick somewhere else to build a factory, rebuilding a supply chains from scratch has its own costs - and is in fact a gamble of its own. We have seen in recent years businesses reversing their decision to offshore production due to increased delays and corruption. Turbulent though Brexit may be, the UK still has a fairly reliable business culture. Business is also mindful that union action is much less prevalent in the UK.

Meanwhile it should also be noted that while Brexit puts UK politics in flux, parts of the EU are not faring much better either. It would seem that Germany is the only safe bet for now.

What I don't understand is why there is such a fixation on rules of origin. Corporates don't seem to have much of a problem avoiding tax in every other area. It is likely we will see them pulling off some innovative stunts to get around ROO. It may even see an increase in investment for 3D printing and similar techniques - which is where the smart money is already going. Supply chains across borders are messy in whatever conditions.

As far as I am concerned though there are far bigger issues than ROO, not least REACH and the EMA where we could find entire sectors excluded from the single market even if tariffs were at zero. It really does seem like bicycle shed syndrome to me.

A wider point I would make is that ROO is generally a lag on trade and nuisance and since as a independent country we have right of proposal in terms of regulatory initiatives we might very well take it to the top table - the WCO - where there are already multilateral initiatives underway to reform this dismal system. You could with advantage look at the issue of harmonising cumulation rules. One of the issues is not ROO, per se, but the fact that there are so many different rules. This is where the UK, as a global player, could help. We are not dealing with a static situation.

Finally I would add how little I care. When I look at Nissan and Airbus I mainly see massive job creation schemes which have a history of taking big government money - largely as part of an industrial strategy to keep jobs in the regions. Though valuable they are a sticking plaster masking a more deep rooted economic decay. Our present economic policy is not working and the status quo is life limited.

If you've been watching China in recent years you will see that their aerospace sector is catching up fast and soon both Boeing and Airbus will have to make some serious reforms to stay afloat. Historically they have been used to bailouts and subsidies for bad designs (A400M/A380). Chinese regional single aisle jets are now becoming a serious market contender. Sooner or later Airbus will have to be run as a business rather than a social policy. And that has massive repercussions for Toulouse which is bloated beyond belief. Filton, by contrast, is the model of efficiency.

As much as Brexit is about a democratic realignment the public have also voted for an economic reordering. A quick visit to Newport or Huddersfield shows you that some regions do not grow regardless of the economic weather and the status quo is not delivering for them. You can argue that Brexit won't make it better, and may even make it worse, but in the end what the economy suffers from the most is the stagnation of the status quo and any movement is sure to bring out a new pattern of economic activity in which there will be winners as well as losers.

It might well be that Brexit does create new barriers - and that will have to be accounted for. Some of the old patterns may reassert themselves. Certainly in the 80's Mercedes and BMW were regarded as prestige brands because they were expensive - when if you went to Germany, you would find the same "luxury" brand as town taxis. Prestige is in the eye of the beholder. Meanwhile the likes of Nissan will have to double down on mass producing cheap and cheerful for the domestic market. Who can say?

What we can say is that there will be change. It's tempting to get bogged down in technical minutia, but we should not lose sight of the fact that Brexit is a deeply political, not economic movement. There are stresses and strains aggravated by Brexit but they were always there. Brexit is the process of settling some of these divisions.

What happens is likely what needs to happen. The economic disparity between the regions and London needs addressing. The Scottish question needs to be settled one way or another. We have to stop pretending there has been a peace process in Northern Ireland. We need a genuine rethink of our economy to meet the demands of the globalised economy and if that means letting go of some of the sticking plasters which have stood in the way of real reform, then so be it. It is a mistake to believe the EU status quo could linger on forever.

The EU has always overreached and its mandate was fragile. Even if the remain camp had won by 2% it would not be sufficient to settle the matter. The same stresses would still exist and would limp on unaddressed until there was a reckoning. It may be inconvenient and costly to have that reckoning now but it was coming anyway. Growth in the the City has been masking a zombie economy for some years now and though we have seen minor increments in GDP, for most of us it's just numbers on a screen. It's the finance tier that is immune to trickle down economics.

As it happens, I would rather the government take a measured and intelligent approach to Brexit and in fact I would prefer we remain for a time in the single market, but it would appear that is now off the table. So would I still vote for Brexit? Yes. Since this all needs sorting out - and has done for a while, I'd rather we get started now.